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Tuesday, April 24, 2007

A top Chevron Corp. executive said Tuesday the push to displace as much as a fifth of the country's gasoline with ethanol will make it less likely the industry will build new domestic refineries.***The push for greater use of ethanol, now made from corn but presumed to be produced from switchgrass and other cellulosic sources in the future, has been framed largely in the context of a need for greater energy independence from imports.

But so has the need for more domestic refineries.

Some Republican lawmakers have cited the shortage of U.S. refining capacity as one reason for high gasoline prices, and the recent run-up in gasoline costs has been partly linked to unexpected refinery shutdowns.

No new U.S. refinery has been built since the 1970s. And while larger refineries have been expanded, U.S. demand for gasoline consistently requires some imports.

When asked if the company might invest in a new U.S. refinery, Robertson had a quick answer:

"Why would I invest in a refinery when you're trying to make 20 percent of the gasoline supply ethanol?"

Robertson said Chevron supports expanded use of ethanol and is "not in any way threatened" by the corn-based fuel. "But it has implications for investments in the United States in refining," he acknowledged, because less gasoline will be needed.

Each spring, just before the summer driving season, gasoline prices skyrocket. And every year, these four words appear in news reports nationwide as a big reason for the runup: "lack of refining capacity."

Then experts call for more refineries, politicians pledge to make the dirty behemoths easier to build, but guess what? Nothing really happens. Next year, repeat story.

So why hasn't a new refinery been built in the U.S. since 1976?

"There have been calls every year this decade for new refining capacity, yet no new projects initiated," said Geoff Sundstrom, a spokesman for AAA, the motorist organization. "Refining capacity has not kept pace with demand for gasoline."

And, it looks like that trend will continue.

"Consumer demand just continues to grow, and we can't grow as fast at the refining level," said Charlie Drevna, executive vice president at the national Petrochemical and Refiners Association, which includes companies like Valero (Charts), ExxonMobil (Charts), Chevron (Charts), and ConocoPhillips (Charts). "But there are plenty of economic reasons why that hasn't happened."

First off, experts note, gasoline, like any commodity, is subject to big price swings. After all, in the late 1990s it was selling for less than $1 a gallon, hardly an encouraging number if you're a refinery exec looking at making a decades-long, multi-billion dollar investment.

While retail gasoline prices are currently near record highs at just below $3 a gallon, where they might be five years from now is a matter of debate.

Some experts say new investment, in both alternative energy and conventional sources, will boost supply and could cut prices in half. If a global recession hit, the drop could be even more dramatic.

Others say rampant demand, especially in the developing world, will keep prices from going anywhere but up. For an oil executive trying to decide on a refinery investment, picking who's right is a tough call.

Secondly, stringent environmental laws and effective community organizing have made it very difficult to build a new refinery in the U.S.

"Everyone is quick to say "look at these refiners, they're driving up the price,'" said Phil Flynn Flynn, senior market analyst at Alaron Trading in Chicago. "But if I wanted to build a refinery tomorrow, I couldn't do it."

And then there's the public's newfound concern over global warming and its supposed commitment to do something about it. President Bush himself has called for a 20 percent reduction in gasoline use over the next 10 years.

"What refining executive in their right fiscal mind would say, gee, we need to add refining capacity right now," said Drevna at the refiners' association.

UPDATE: Platts reports on a phone conference between some energy bloggers and the head of th API during which ethanol was discussed:

The call occured just after the release of the study by Stanford University atmospheric scientist Mark Jacobson projecting significant increases in some atmospheric pollutants should ethanol use continue to increase.

Cavaney is concerned that for the industry, the increased use of ethanol is going to wind up in another round of lawsuits just like those the industry faces because of the use of MTBE. Cavaney said that during the move to reformulated gasoline, when it was clear that Mtbe was going to be an all but mandated additive, the industry said to the federal government, "If youre going to embrace something this big, you need to take a look at it."

API's fear is that such a review won't happen in the rush to use more ethanol, and if air quality decreases as a result, the lawsuits against the companies that have blended ethanol will be targets of a new round of litigation. "So I think maybe what this Mark Jacobson study may well do is help serve as a bit of catalyst to make sure that we do take a good look at this so we fully understand what the results are going to be, regardless of whether hes correct or not," Cavaney said.

Cavaney's skepticism toward ethanol -- not cellulosic, but corn-based -- comes through clearly. "The energy content is only about 25 percent less than it would be if you used regular gasoline," Cavaney said. "In the many years Ive been in this industry, I have never had a consumer, an elected official, tell me that I want to pay more for my fuel and I want to get less miles per gallon, and thats exactly what you get when you buy E85."

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The main focus of this blog is maritime security. Other matters may appear. I am a retired attorney and a retired Navy Reserve Captain (Surface Warfare). Opinions expressed herein are my own. Sometimes I have the experience to back them up. Your opinions may vary. Don't panic. Feel free to disagree, that's what free speech is all about.
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